Thank you, everyone, for joining us this afternoon. My name is Keith Weiss, I'm one of the software research analysts at Morgan Stanley. We're very pleased to have with us here today Richard Beckert, CFO of CA.

And I thought maybe an interesting place to start out is talking about 2 of the dynamics we're currently seeing going on at CA right now. On one hand, you put in place some new sales and marketing strategies in your FY '13. And it seems like some of those are beginning to gain some traction.

On the other hand, you just got a new CEO on board. Michael Gregoire has joined the company and currently conducting a strategic review within CA. So I guess the overall arching question is, how much change do we see on a going-forward basis? Almost how much of an asterisk do we have on this discussion today that there is a potential for significant changes going forward under Mike?

Richard J. Beckert

Okay. Well, hello, everyone. I would say a couple of things. Mike, he started January 8. So he's just in the middle of his deep dive on a lot of different areas. So it'd be premature for me to say exactly how far Mike would take anything in any one direction or another.

That being said, I mean he's focused a lot of his time early on in really getting to understand the technology. His background is technology, that side of the -- as opposed to the sale side, which is where our previous CEO was. So as he's ongoing through delearing [ph] a lot of these things, he will, I'm sure, help us reprioritize some of the portfolio.

I think if you look at the overall portfolio and R&D as an example, 14% E/R, I think that you'll probably most of you find that to be in line with the industry. And so that's about the right envelope. Inside of that envelope, I'm sure you'll see us move things around from one particular product to another. Mike brings a background as a SaaS. He's spent nearly, I think, 8 years building out his previous company. And he has already started to make an impact in our ability to go look at how we support the SaaS platforms. So that's going to be very beneficial to have someone with that kind of history as we build out. Right now, we only have like 4, 5 products that are in the SaaS. But as we build that out, I think we're going to get a jump start.

Your earlier question on the sales piece. What's been beneficial so far is that we did have a slow start as we migrated people off of what we call the large existing, this -- it's half of the Fortune 2000 that we play in then have a high penetration over to the other half of the Fortune 2000 that we weren't playing very well in. And that was by design was to go de-stack people and help get our expense-to-revenue ratio in line. And the second part of that was for us to spend more time on these accounts so that we can become a better partner with those customers and drive sales.

Keith Weiss - Morgan Stanley, Research Division

Got it. And its [ph] recent have in Q3, I made a presumption that you're seeing some traction on it. To what extent are you guys seeing sort of the positive traction, the positive results from those change in sales structure that you expect?

Richard J. Beckert

Sure. So the first half, especially Q1, it was pretty disruptive as we broke apart the sales team. And that was by design we picked the low quarter and the low year of our 5-year cycle of renewal. So if we were going to have a slowdown, we wanted to make sure we did it in that quarter. I think what we saw though is the buildup of that into Q2 is slower than we had wanted. And although our revenues weren't that far off, what we really saw that was far off was the building on the pipeline in the out-quarters. And at that time, that's what causes in Q2 to take the change in the guidance. That being said, what we saw in Q3 is sort of the rebound of that, and you're really starting to see the pipeline build for those people, in those accounts that we, historically, would not have had much traction in. So it will take a while, and it's a journey, but we are starting to see a benefit of that.

Keith Weiss - Morgan Stanley, Research Division

Got it, got it. And then one of the things Mike spoke about on the most recent call was the opportunity to push more of your sales and marketing personnel into a core accounting role. And I think something that makes analysts' ears always perk up when we hear the potential of additional sales capacity. Could you give us a little bit more color into what Mike is actually referring to there? Would this actually represent an opportunity for you guys to increase your overall sales capacity by pushing more people into those types of roles?

Richard J. Beckert

Well, so we have people today that are either technical sales specialist or an AD [ph] or an AM [ph]. And what we found is we were going to market on some of these accounts that were somewhat dormant with a very heavy model. So we've taken and unlayered [ph] some of those folks, and they are still carrying quota, but now they're going to live and die by their ability to sell into these other accounts. So therefore, in essence, you do have more feet on the street. And if nothing else, you have a much better expense to revenue when it comes to commission payout.

Keith Weiss - Morgan Stanley, Research Division

Got it. Switching to the R&D side of that equation. Again, one of the things that was talked about in the Q4 call was the idea of, CA spends a lot on R&D, over $600 million a year in R&D spending, but I'm trying to get more focus on organic innovation. So what's the R&D spend that's not organic innovation? And what exactly do you mean by organic innovation? What are you trying to drive there, overdrive more spends towards?

Richard J. Beckert

So we spend, as you say, over $600 million in development, but we also spend another $300 million to $500 million in acquisition. So we're pushing $1 billion when you think about if we're going to buy it or build it. When you get under the covers of the $600 million, we have a fair amount of older products that have multiple releases out there, that we're supporting. So it could releases literally 1 through 5. And so we have a big push to get down to N and N minus 1, [ph] maybe N minus 2 [ph], and that will free up people that are doing more of a support role and push those to leading edge technology, therefore building out an organic product.

Keith Weiss - Morgan Stanley, Research Division

Got it, got it. I'll turn to the macro environment in a little bit. Two months into the calendar year, you guys are getting close to finishing out your fiscal year. What do you hear from customers regarding spending plans for calendar year 2013? And how did those discussions compare to sort of what you're hearing last year at this time?

Richard J. Beckert

Well, I don't know if the economy's really gotten much better, I mean, maybe the people in the room would think differently. I think it's become probably, if anything, people have now become accustomed to it. And so therefore, I don't think even last year, we didn't see really much of a change in approval to require or anything like that, the length of time for transactions or good put through.

The fiscal cliff clearly caused the issues with some government contracts. And we're still seeing that to some degree, but I think Greece kind of settling down probably helped a little bit in Europe. But I think it's a little bit probably unfortunate a little more the same.

Keith Weiss - Morgan Stanley, Research Division

Got it. Any sense of that sort of fiscal cliff uncertainty translating or sort of just moving into now sequester uncertainly or...

Richard J. Beckert

Yes, that was my point. It just moved from a different title to basically the same anxiety people have, unfortunately. And I think...

Keith Weiss - Morgan Stanley, Research Division

A little bit of not having a budget. That's the correct word.

Richard J. Beckert

And I think though, unfortunately, what that really puts pressure onto some of the government contracts, maybe the length, depending on which agency they are. They have different things that now is putting a little bit of slowdown on some of their stuff.

Keith Weiss - Morgan Stanley, Research Division

Got it. You do talk about some more positive momentum in U.K., France and Germany in your opening, most recent quarter. You guys had made some changes there a while ago, I think it was about 18 months ago. How much of that do you think was maybe stabilizing further than that? Or how much of it was positive impacts of the changes you get in there?[ph]

Richard J. Beckert

The macro, we were never blaming our performance in Europe on the economy. I mean clearly, it would have been great if it was a booming economy. But what I think we had done was because of the ever-changing shift at the top was causing middle-management to move too many people around. We had lost a little bit of the thread on a consistent person as your partner with the customer. What you now see, Mark will be in here about 1.5 year is stability. And the other thing, as we unstacked and moved people to these new accounts, we have a whole way of metrics that we actually can kind of drive the performance of the different regions around the world. And it allows us to really see who's performing, who's not performing and where they need help. And sometimes it could be a technical help or it could be no executive help or it could be that you have the wrong people in those roles. And I think basically by moving, building the pipeline, pipeline progression, we're actually seeing at least now much better headlights into that region of the world.

Keith Weiss - Morgan Stanley, Research Division

Okay, excellent. And maybe now we can drill a little bit more down into CA specifically and talk a little bit about some recent results in your financial model. But before we dig down too much into recent results, perhaps I could set a dish and invest a little bit in terms of what do you want, what do you think investors should focus on as the key metrics in CA? There's a lot of moving parts. You have a model that isn't straight in line with a lot of other models out there. And you do give a lot of metrics on your quarterly conference calls. What are the key ones that you would point investors to focus to into really tracking in sort of near-term progress you guys are making in your model?

Richard J. Beckert

A couple of things. I think the current revenue renewal, the current revenue that we have in the backlog, that is an indication of what revenue is coming off the balance sheet over the next 12 months. And clearly, that gives you a lion's share of what the revenue is going to be, there's upwards, downwards, going sideways. So that metric is very straightforward. I think as we talk about the renewals in general and about how they are coming across over the course of the year, that allows people to figure out maybe some of the timing. I think the renewal yield, so how did we do on the renewals? It's something that we are comfortable with. And then, overall, when I first became CFO, we segmented the business into mainframe and enterprise solutions, which is our distributed and services. And that really allowed people to get under the covers and see how those businesses, which were fairly distinct, are operating. And you can see where the quarters when we're doing well and then the quarters where we're struggling. So I really think those are the key metrics.

Keith Weiss - Morgan Stanley, Research Division

Okay, got it. We've been talking about this sort of more difficult first half of FY '13, the improvement in Q3 and sales product or sort of a better traction with some of these sales changes and building out that pipeline, as a key indicator. Any other positive aspects that's sort of driving that momentum in Q3 that we should be thinking about?

Richard J. Beckert

Well, the back half of the year, by definition, just has more renewals. So the attach rate that we have with the renewals, we benefit from that, so that it becomes an impending event. An interesting note, we haven't seen the attached rate change in the last couple of years. So that percentage has been pretty consistent, which I think would probably maybe surprise people during the economic downturn. What you did see though is people not buying anything and waiting for that. So therefore, and in general, they maybe could potentially have bought less.

Keith Weiss - Morgan Stanley, Research Division

Okay, got it. And in the other side of the equation is obviously renewal yields. And how are you all doing that? You guys talk about sustaining low 90s. This is the level you guys have pointed to as sort of the historical average. Is this what investors should look to as the kind of the targeted renewal here or renewal yield? Or is there a potential for this to move higher over time?

Richard J. Beckert

It could potentially move slightly higher. It will be somewhat handcuffed though by the breadth of our portfolio and the maturity of some of our products. So that does put some downward pressure on that number. In order for it though to be a healthy business, we want to keep it around 90. If we get too far up into the 90s, we want to make sure that we have a positive relationship with the customers. And so we don't want them leaving that situation feeling that they were strongarmed into much higher numbers. So if you get too close, there's times where we absolutely get over 100%. I don't want people to think we don't. But if you force everyone to be 100% or better, you will damage some of the relationships that we've been spending the last 6 years rebuilding.

Keith Weiss - Morgan Stanley, Research Division

Got it, got it. And then on the attach rate side of the equation. Attach rates you said have been holding steady. But I would assume that one of the focuses you guys have on a going-forward basis, given how strong or how large of a customer base you have, given how broad of a product portfolio would be to improve those attach rates going forward. What are the initiative you guys have in place? Or how do you look to improve those attach rates on a go-forward basis?

Richard J. Beckert

That was some great questions. So part of the reason why we separated out the sales force was to go after selling outside the renewal cycle. And so therefore, what had happened before is if you had the ability to make your earnings on that renewal, then you are going to wait for that renewal. But the fact that we pulled people out of that side of the business, they now have to go sales standalone. Now by selling standalone, the benefit to CA is a lot of times it'll come in at a better price because you're not being dragged into a much larger transaction. And the other piece of that is it allows us to compete with probably in some ways with some of the point products that we're competing against. A flip side to that is sometimes we -- it's best for us to be in the renewal because then we can absolutely leverage that renewal against some of these point product companies as well. So it really is a double-edge sword.

Keith Weiss - Morgan Stanley, Research Division

Right. The part of the business that I think was a little bit disappointing in Q3 was the new product and capacity sales. I think if you adjust for that single license payment last year, they're still around about 5%. What do you see is the biggest weight on growth here? Where do you guys really need to sort of improve to get that trending better?

Richard J. Beckert

I think, as we just said, selling outside of -- because remember, we had a very low renewal year. So therefore, by definition, it's going to be a lower number. I think the second part of that is as the economy does start to at least stabilize, if you will, people will be a little more willing to buy a little further ahead and a little more capacity. You definitely saw people buying not just in time but a little bit more than maybe what they require as opposed to a lot more. I think the last piece of that is when the M&A activity kind of slowed down, that also as you saw then a lot of capacity access. Capacity where they had thought they were going to do an acquisition, they wound up not doing an acquisition. Now they're stuck with excess capacity. And it took a while I think for a lot of companies to burn through that.

Keith Weiss - Morgan Stanley, Research Division

Got it, got it. Turning to the margin side of the equation. You guys targeted about 200 basis points of margin expansion for FY '13. Can you maybe reference [ph] where the bulk of that leverage comes from?

Richard J. Beckert

So in the current year, when we started the year, we were going to do a 35% growth over the previous year. We did have, in the early part of the year, the transaction that we benefited from. It was some IP, and then we allowed that to flow through the bottom so that we were able to actually get to 36%, which is a year ahead of where we thought we would be, even though we did change guidance down from a revenue standpoint. So that was actually a pretty good piece of work with the company, to really keep in control on the spending and rebalancing within the company in order to drive the 36% margin.

Keith Weiss - Morgan Stanley, Research Division

Got it. As we look forward and just from a high level view, you have mainframe margins at 60% around, you have enterprise solution margins at -- in the low teens, I think 11% was the best one you gave with a series out 4%. [ph] Given that enterprise solutions are supposed to be the fastest growing part of this business, how do you offset that sort of mixed shift pressure that would impart on your overall margin structure?

Richard J. Beckert

So as I said earlier, we have some distributed products that are fairly old. It could be 30 [ph] years olds or more. We need to have those look and feel inside of that enterprise solutions like a mainframe-type margin. And the fact that we had multiple releases that we were keeping alive and well was preventing that from happening. The other piece of that is to realize when something has come either the total market has slowed down or maybe we missed the market to make sure that we pair those out faster and don't let those bleed out. We can actually be very successful with some products that maybe have lower growth at a very solid expense or revenue ratio, and you'd be very happy with margins that get up there. The overall mix to your point will always trail the mainframe just because of where that is in the growth.

Keith Weiss - Morgan Stanley, Research Division

So it sounds like the answer is in order to offset that mixture towards enterprise solutions, you need to improve those enterprise solutions...

Richard J. Beckert

Within the Enterprise Solutions. We're not looking to expand the mainframe margin. That business has actually managed fairly well.

Keith Weiss - Morgan Stanley, Research Division

Right. And I mean have you guys ever given the target of where you think those Enterprise Solutions margins can be?

Richard J. Beckert

We haven't given an official target on that.

Keith Weiss - Morgan Stanley, Research Division

Okay, got it. And then looking forward into FY '14, you talked about a renewal portfolio that was declining. Was it sort of a pressure on CA in FY '13 and that renewal portfolio being up. I think you guys talked about double-digit growth in FY '14. All else being equal, it sounds like that should make FY '14 a very good booking year for CA.

Richard J. Beckert

It will definitely show that you'll have a higher renewal year-over-year. And if our historical tax rate is consistent, with those renewals, I want to caution everyone. It will all be back-half loaded just like this year. And so when this back-half loaded in a large portion of our business is ratable revenue, the impact in our revenue will be tampered down, compared to the bookings, so people shouldn't get energized build over 10-plus percent growth rate and not see that come back because it will be back half of the year.

Keith Weiss - Morgan Stanley, Research Division

Got it. I wanted to turn the discussion towards some of the end markets. But I want to take the opportunity to open up to question the audience. Anyone else want to jump in? All right. I'll keep going then. With everything. I'm just doing such a good job that no one needs to interrupt me. So one of the issues and comments I thought Mike made on the most recent conference call was a comment about the value in the IT market moving up its stack to management automation and security. So if, from our perspective, we always like to think about the stuff, things in terms of where is value moving to and where is it moving from? In relation to that comment, we see where you guys think is moving to. Where is that moving from? Where are order guys taking the budget to fund those initiatives?

Richard J. Beckert

Well, I think some of the lower end things are getting commoditized. And so they're either getting commoditized in the true meaning of that or that there are lower end providers coming in with good enough products that are put -- which are then putting pressure on maybe a product that you have that might do a lot more. And if you're selling that product at the lower end, you're going to have to come down to that price point. And so there's definitely a marginalization of what could be a product because it doesn't see the same value to the same customer. I think he spot on -- when you start looking at like we announced CloudMinder today, it's a security product. I think when you see those kind of things come out, being secure in the cloud is one of the big things that's keeping people from moving to the cloud. So those kind of announcements are really where the puck's going.

Keith Weiss - Morgan Stanley, Research Division

Got it. I mean, did that speak at all to sort of a dynamic going on within your product strategy of where you have to shift focus towards higher value solutions, and there's something of a self-cannibalization that has to go on?

Richard J. Beckert

Yes, we clearly do that. What you want to make sure is you do it in an intelligent way and it gets back to why do you think you should be able to expand your enterprise solution margin over time is you want to be the person cannibalizing yourself as opposed to having your competition doing it to you. So that's the single most important thing. And then the second part, it was my comment on ELA. There's times when you can leverage that, which allows you to have better strength when you're competing against a single point product company.

Keith Weiss - Morgan Stanley, Research Division

Got it. On the mainframe side of the business, you guys have talked about longer-term just being generally growing in line with the mainframe market, but it's a relatively slow growth platform for you guys. IBM continues to talk a lot about efforts to revitalize that platform. Did you see any positive impact today from those revitalization efforts?

Richard J. Beckert

Sure. And as CA, we came up with the Chorus product line, which makes the old green screen for people that are old enough to remember the green screen, if you take the Chorus product line, it actually now has a much easier gooey interface that has to be more dials, knobs and you can use it with a mouse. For us what that does is not about that product making tremendous amount of money, it's about our customers being able to now not have some new higher end of data management or be afraid to go work in the mainframe space because it has the same look and feel. The second part of that, from the IBM standpoint, they now have boxes where you can run the distributed products under the covers with from the risk -- I'm sorry, from a Linux standpoint. And I think what you'll see over time is that's really more them collecting farms of stuff from bringing it back in-house. And for us, personally, why that's good is we have products that run in both places. Those Linux products will show up in Enterprise Solutions space, not the mainframe. But it also breathes a lot of life back into their iron. It drives a total cost to ownership down and that benefits the platform. And so really all the companies that are competing there, we want to be on the margin as competitor of a more competitive within any other product out there. And when they come up with those innovations and we come up with our innovation, it allows us to compete on the technology that -- people talk about virtualization. I mean, they do it better than anyone. So there's just certain things that it does really well. There's other things you should -- you have no business putting on the mainframe. So -- and I think we all know where those things start and end, and it's been really beneficial to see them continue. The mix growth that they had at other factors is interesting. It was -- a lot of it was on Linux and their specialty engines. That gives us opportunity in the future at some point in time. When those markets become big enough, we can decide how much we want to invest in. And we see some rebirth in some of the emerging markets, believe it or not, are coming up with new mainframes, which is a surprise to people. And so over time, we'll populate those as well.

Keith Weiss - Morgan Stanley, Research Division

Got it. On the distributor side, I can't remember the last time I listened to a CA conference call and didn't hear about Nimsoft doing well. It seems to be different, one of the stand-up performance you guys over time. ITKO has been another really strong performer. Can you review for us what has made these products, in particular, so successful for CA?

Richard J. Beckert

Well, I would say initially Nimsoft, when we came out of the gate with that, it wasn't exactly how fast we wanted to go. We actually went in and invested more time, both from a development standpoint and how we were going to market with it. We're trying to go to market kind of this traditional way that we were and this was really meant for a lower end, either department or a smaller company, within the Fortune 5000, but maybe not in the Fortune 2000. And so we modified some of that and it has done well. It had a couple of good quarters in a row. ITKO is the ability now to, in essence, do things in the cloud, but not to build one out. And so now you can do your development and testing. And so it's a really cool tool. People have a chance. You can go look at all these actually out on the website. And we're really starting to see some good success. On the Nimsoft, we actually saw good success in Europe. So that was one of the first products that were starting to come back. And ITKO, we're getting good success, and I told you there's a dormant 2,000 accounts. That's sort of the kind of the product that people see and they say, "Okay, we'll come back and talk to you guys," and it's allowed us to kind of reopen the door and have some good conversations.

Keith Weiss - Morgan Stanley, Research Division

Got it. In particular, you talked about Nimsoft being sort of more focused on the mid-market, more focused on the departmental [ph] solutions. And I think also distribution capability came along with Nimsoft. Have you been able to leverage that with across, I mean that same distribution capability with any other products?

Richard J. Beckert

The RMDM [ph] product line, they now share a lot of the same back office. So we've combined them and some of the same sales force that's in our growth markets, we call that. So that together that's a go-to-market statement. So that's been beneficial.

Keith Weiss - Morgan Stanley, Research Division

Got it. Do you think that type of strong growth you've seen in FY '13 with these products sustains in FY '14?

Richard J. Beckert

ITKO is really just starting. So yes, I definitely see that as a benefit going forward. In Nimsoft, what we're starting to see is it's having success outside the U.S., which is a good for us.

Keith Weiss - Morgan Stanley, Research Division

Got it, got it. The RS Day conference is taking place down the street, maybe we talked about your product data fit that you guys had put out I think earlier today, right? I think the security portfolio is one of the areas that CFI guys may or investors may overlook a little bit. Can you tell us a little bit about what sort of gives a little color on the portfolio, how well you guys are doing there or where you see the real core opportunity for CA in security?

Richard J. Beckert

Right. So our security products are not -- what they really allow people to do is identity match. And so we actually have some very good leading edge identity management products. We also acquired Arcot [ph] a year or 2 ago. And you put that into the portfolio. We've always had a strong mainframe product. So it kind of tops to bottom. We have product, believe or not, so people can use credit cards and have security that way. It came in through Arcot [ph]. It's been very successful, more of a SaaS model. It is a SaaS model. So people don't realize that, that product's actually done very well. So we do have security going across. We know it's critically important in the cloud. And so part of what we've been putting out in our investment has been going that way. Customers will use the cloud more and more as they feel their information is secure, especially with all the cyber activity that's been going on.

Keith Weiss - Morgan Stanley, Research Division

Have you been -- one of the sort of big pressure to business security is security as a standalone solution, security in terms of your overall infrastructure becoming more secure. To what degree have you guys been able to push some of that identity and security expertise into the broader product portfolio?

Richard J. Beckert

They're in a lot of ELAs [ph]. But they usually do start a standalone transaction because it's secure. A lot of times you're selling to the security officers, could be a different sale than other parts of the company. The sales tend to be a little bit longer because you're kind of buying in all in. Like for the entire company is going to go with a particular vendor. So it might be a little longer sale. But once it's in, a fairly sticky product set. And as long as we keep that competitive, which we have been, we see success, a pretty good success with the security platform.

Keith Weiss - Morgan Stanley, Research Division

Got it. Before I wrap up, I just want to take one more chance to see if anyone has any questions from the audience? All right. So M&A seems to be -- is going to continue as part of the strategy. How should investors think about on a going-forward basis, how you guys are looking to forge M&A versus how you have historically?

Richard J. Beckert

I don't think it is going to be that different from the standpoint that what we've been doing over the last -- I've been here 6 years, 3 of them as the controller and then 2 now as the CFO. We do a build versus buy. And if the build versus buy makes sense, you're going to go one direction or the other. To the degree that we can't see ourselves building that out in a timely manner, and that therefore we're going to lose a lot of time in the market, and then we're going to go the acquisitive route. You saw us do some acquisitive from a 2-year period, and then this year it kind of slowed down. We didn't do a lot of acquisitions. And then that will change, and that rating pace were kind of ebbs and flows. As Mike's come on board, he's really, absolutely doing the due diligence deep dives. And we're starting to put the portfolio until we know what should we build, what should we buy, you can imagine he's much more if he wants to build it. But at the same, he's bought plenty of companies in his previous company. So I don't see that really changing the dynamics that we have there. I don't really see changes. We have a pretty structured process for that.

Keith Weiss - Morgan Stanley, Research Division

And maybe one last closing question. In terms of your interactions with investors, would you say that there's any -- what would you say is the point that investors least understand or perhaps even misunderstand about CA and what you guys are given over there?

Richard J. Beckert

I think inside -- I think sometimes people don't realize how large our Enterprise Solutions, the distributed product set is. It's $1.8 billion. And I think inside of that, we have some technology that actually is very much leading edge. And a lot of people don't realize that we have some very good leading-edge technology. And I think the, probably the last thing on that is we have a lot of opportunity as we continue to drive towards execution and get a drum beat of just executing day in and day out. And we have a lot of upward potential.

Keith Weiss - Morgan Stanley, Research Division

Excellent. Well, thank you very much for joining us.

Richard J. Beckert

Thank you.

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